why woyld a market shut down or produce

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Expert Solution

A firm decides to shut down its production when the revenue earned from the production of goods and services are not able to cover the cost of production, which is variable. Thus in such a situation, the firm will have to face more money loss if it produces goods and services than if it does not produce any goods and services. If the firm reduces their production, it will also cause financial loss to the firm. Thus only option is to shutdown the firm. That means, to stop production completely.

If the firm is deciding to decrease its production, the variable cost cannot be covered by the revenues earned from goods and services. But if it shuts down its production, it will have to face only loss of fixed costs.

If at the profit maximizing point when marginal revenue is below average variable cost, shut down occurs. Shutdown does not mean that the firm is quitting the business. It is only for temporary. When the situations improve, it will again start producing. Thus shut down are decisions made only for short run.

Rahul Sunny answered 1 year ago

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